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“Reduced-Pay” Option in Long-Term Care Policy Ambiguous – 7th Cir.

02-08-2018, 10:58 AM

“Reduced-Pay” Option in Long-Term Care Policy Ambiguous – 7th Cir.

Attached hereto is a case out of the Seventh Circuit, Newman v. Metropolitan Life Insurance Company. This case involves language in a long-term care policy. Plaintiff purchased a private policy of long-term care insurance via defendant. Plaintiff decided to apply for the coverage based on a “Long-Term Care Facts” brochure that contained the following language:

Reduced-Pay at 65 Option: By paying more than the regular premium amount you would pay each year up to the Policy Anniversary on or after your 65th birthday, you pay half the amount of your pre-age 65 premiums thereafter.

When plaintiff received the policy, it contained the following term:

In addition, you have selected the following flexible premium payment option:

Reduced Pay at 65 Semi-Annual Premium Amount: Before Policy Anniversary at age 65 $3231.93
On or after Policy Anniversary at age 65 $1615.97

At various points throughout the policy defendant reserves the right to change premiums. When plaintiff reached age 65 her premium was reduced, however, when she turned 67 her premiums doubled. Plaintiff filed suit alleging a cause of action, in part, for breach of contract. Defendant filed a 12(b)(6) motion to dismiss. The district court granted MetLife’s motion finding that the policy’s terms unambiguously permitted defendant to raise plaintiff’s premiums. Plaintiff appealed. The Seventh Circuit remanded the case back to district court, finding the “Reduced-Pay” option in the policy to be ambiguous.

Little in Newman’s policy elucidates the terms of the Reduced-Pay option. It offers one illustration with two numbers: Newman’s “before policy anniversary” premium; and her “on and after policy anniversary” premium. The first amount is twice the second. Newman deduced from this example that upon reaching her 65th birthday, her premium would drop to half of what it was the day before. MetLife agrees that this is what the policy says. The disagreement arises at the next level of detail. MetLife takes the position that the only guarantee is that from the policy anniversary following Newman’s 65th birthday onward, Newman’s premium will be half that of a Reduced-Pay policyholder who has not yet reached age 65. Newman reads the policy differently. She understands it to fix her post-65 premium at half the amount of her pre-65 premium.

Our independent review of the policy satisfies us that Newman has offered one reasonable interpretation of its language. The illustration, which was unexplained, reproduces the cost of her personal premiums. It gives no indication whether these are the same premiums that all Reduced-Pay policyholders were paying, and would pay, or if they were particular to Newman. A reasonable reader easily could think, however, that “on and after” the policy anniversary following age 65, the policy holder (here, Newman) will pay half of what she personally was paying prior to that anniversary date. Since the person’s 65th birthday converts the pre-anniversary premium into a historical fact, a premium set at half that number likewise becomes fixed. In other words, if N is set in stone, so too is half of N.

MetLife responds that even if the portion of the policy referring to the Reduced-Pay option might be understood as we just explained, that reading is supportable only if that passage is divorced from the rest of the policy—an impermissible step. While it is true that the Reduced-Pay excerpt cannot be read alone, in this case the remainder of the contract does not win the day for MetLife.

Four times in the policy MetLife reserves its right to change premiums. Three of those instances reserve MetLife’s right to do so on “a class basis” or for a “class as Yours.” These passages do not resolve the ambiguity, because the word “class” is undefined. It might mean age, in which case class membership is independent of payment arrangements. But it might refer to the payment arrangement, so that everyone in the Reduced-Pay group comprises a single class and the effect of class membership is defined by the terms of the ReducedPay option.

Newman believes that it is the latter, and thus that the Reduced-Pay customers have purchased the right not to be treated in the same way as ordinary policyholders. The policy’s inclusion of the Reduced-Pay illustration, terse as it may be, supports her interpretation. Including language about class-wide changes does not alert her that she is part of a class that is broader than her Reduced-Pay group. Absent some clarification, Newman had no reason to question her understanding that she had removed herself from the class of typical policyholders—those who had not purchased a frozen premium after age 65. Even MetLife’s reservation of the right to change premiums for all policies in a “class as Yours” does not help matters. Newman knew that her premium, and those of others whom she might regard as classmates, might increase before she turned 65. But the only “class” to which she thought she belonged was one that exchanged an increased (and perhaps variable) premium pre-65 for the right to have a stable and lower premium after 65. The baseline for a person in this class was the premium she paid pre-65; nothing in the policy tipped her off that the baseline was instead whatever people of her age were ordinarily charged, no matter how often or when that number changed or what payment arrangement was in place.

The fourth suggestion that premiums might change appears in the Lapse Rider. Though the rider countenances the possibility of a “Substantial Premium Increase,” its illustrative table shows that the definition depends on the policyholder’s age at the time of issuance. The rider accounted for policyholders who purchased their long-term care policy at ages greater than 65. How, then, could the rider speak to the specifics of the Reduced-Pay option, which could be issued only to people who had not yet reached their 65th birthday? A reasonable person selecting the Reduced-Pay option could conclude that the rider was beside the point

In short, none of the four references in the policy to MetLife’s right to change premiums sufficed to disabuse a reasonable person of the understanding that purchasing the Reduced-Pay option took her out of the class of policyholders who were at risk of having their premium increased after their post-age-65 anniversary. The policy is thus at least ambiguous, because it can be read reasonably to fix such a person’s premium, if she had opted for the Reduced-Pay option. That means that Newman prevails on the liability phase of her contract claim.